The states will lose on Medicaid
And it’s a good thing, too.

Article Highlights

  • The individual mandate question holds great constitutional interest, but the outcome won’t greatly affect Obamacare’s operation

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  • Expanded #Medicaid program expected to cover additional 16 million at a cost of upwards of $500 billion between 2014 and 2019

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  • With our without Obamacare, the states’ obligations are simply unsustainable

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In its review of Obamacare's constitutionality, the Supreme Court will examine two substantive parts of the law: the "individual mandate" that compels private citizens to purchase health insurance or else pay a penalty; and the statute's massive expansion of Medicaid. While the mandate question holds great constitutional interest, the outcome won't greatly affect Obamacare's operation one way or the other. The Medicaid question, in contrast, is crucial. The expanded program is expected to provide health coverage for an additional 16 million poor and near-poor, heretofore uninsured individuals, at a cost of upwards of $500 billion between 2014 and 2019. In a brief filed earlier this week (find it here), the litigating states claim that the statute unduly "coerces" them into participating in the program, in violation of the constitutional federalism balance. Should they prevail, all of Obamacare will have to be re-negotiated.

"The states won't prevail on their Medicaid claim. Nor should they. Conservatives' vocal support for the states' opportunistic position is incoherent as a matter of both policy and federalism theory."

That re-negotiation, of course, is the holy grail of conservative agitation. However, the states won't prevail on their Medicaid claim. Nor should they. Conservatives' vocal support for the states' opportunistic position is incoherent as a matter of both policy and federalism theory.

Originally enacted in 1965, Medicaid is a "cooperative" federal-state program. If a state agrees to provide medical services for certain populations, the feds pay between 50 and 83 cents of each dollar spent on the service. (The match, or "FMAP," depends on the state's wealth, with poor states receiving higher matches.) For participating states, coverage of certain populations and services is mandatory. However, states may voluntarily cover additional populations and services. All have done so, to varying degrees.

"Conservatives' vocal support for the states' opportunistic position is incoherent as a matter of both policy and federalism theory."--Michael Greve

Obamacare builds on this regime. Beginning in 2014, it requires participating states to cover all individuals up to 133 percent of the federal poverty line. The federal government will pay 100 percent of the costs for these "newly enrolleds." While the ratio will gradually decline to 90 percent by 2019, it will remain above-for most states, far above-the current FMAP. Texas, for example, the noisiest among the litigating states, will see its FMAP shoot up from currently 60 to almost 70 percent. What's there not to like?

Constitutionally, the states hang their opposition on a single sentence in the Supreme Court's 1987 decision in South Dakota v. Dole, hinting that conditional funding statutes may encourage but not coerce states to participate. While no federal court has ever followed that suggestion, the states argue that Obamacare crosses the threshold where fiscal inducement ends and compulsion begins. In the great majority of states, Medicaid consumes well north of 20 percent of the state budget. No state could possibly replace federal matching funds that would be "lost" if the state were to opt out.  Moreover, because federal Medicaid expenditures are paid from general revenues, a withdrawing state's taxpayers would still be on the hook. Their tax payments would remain unchanged-and be distributed to all other states and their Medicaid programs.

All this is true, but it doesn't help the states' case. All federal funding statutes provide money that the states think they cannot afford to lose (else they'd opt out), and all are cross-subsidized from general revenues. A few conservative theorists have suggested that all those statutes are unconstitutionally coercive.  However, the litigating states wisely disavow that position, knowing that the justices are not remotely inclined to entertain it.

"Supposedly, Obamacare is unconstitutionally coercive because it makes Medicaid, already the biggest and among the most generous of all federal funding programs, yet bigger and more generous. How dare the feds fund state-run programs at 100 percent: have they no decency and respect for the federal balance?"

Perhaps, some funding statutes are impermissibly coercive-but which, and why? The "coercion" theory seems most plausible when a tiny tail of federal funding wags a large dog of federal compliance mandates and regulations (as, say, with No Child Left Behind, which pays around ten rather than 50-plus, let alone 100, cents of each state dollar). This is what the Supreme Court had in mind in South Dakota v. Dole, and what states mean when they protest "unfunded mandates." Their complaint now is just the opposite: supposedly, Obamacare is unconstitutionally coercive because it makes Medicaid, already the biggest and among the most generous of all federal funding programs, yet bigger and more generous. How dare the feds fund state-run programs at 100 percent: have they no decency and respect for the federal balance?

Why did 26 states join this implausible campaign? The decline of the funding ratio from 100 percent in 2014 to 90 percent in 2019 is an unlikely suspect. The costs-at most three percent over what the states would wind up paying in any event-are too incremental and too far in the future to concern current state politicians. What dominates their calculus is Obamacare's requirement that states must continue to provide all currently provided services to all currently covered populations-or else, opt out of Medicaid altogether.

This "Maintenance of Effort" provision does have very severe-if you will, "coercive"-consequences. With or without Obamacare, the states' obligations are simply unsustainable. However, the states do not come to the table with clean hands. In large measure, Medicaid costs have exploded not on account of federal mandates but because over the years, states voluntarily opted to cover many additional, "optional" services-usually with the purpose, and always with the effect, of maximizing federal funds.

Naturally, state politicians resent being held to the bargain. They would prefer a regime that would allow them to ditch the optional populations and services on day one and re-enroll everyone on day two, with yet-bigger benefits, under Obamacare's 100 percent formula. This is the real gravamen of the states' complaint.

While the states' claim lacks any legal merit, at least it makes sense in terms of their political incentives. Not even that much can be said about conservatives' eager embrace, in earlier amicus briefs and in the blogosphere, of the states' position. On that theory, minimally funded but onerous federal programs are okay: the worse the mismatch, the easier it is to say "no." This is a very odd position especially for a political camp that has for decades inveighed against "unfunded mandates." Similarly, the states' rank opportunism and their complicity in the fiscal disaster that is Medicaid should make conservatives think twice about the wisdom of "block-granting" the program (as envisioned, for example, in Congressman Paul Ryan's otherwise thoughtful budget plan). Yet more local discretion to spend federal dollars and to manipulate the system for short-term advantage-but long-term ruin-is the last thing the country or for that matter the states need.

"The only agenda that makes fiscal, political, and constitutional sense is to disentangle "cooperative" state and local programs. Nationalize Medicaid-and give the money to the poor, not politicians; to people, not places or providers."

In any version, the "coercion" theory is a harmful distraction. The combination of central taxation and local spending authority is inherently destructive of fiscal and political responsibility-regardless of the mix of funds and obligations, and regardless of any imagined federal-state "balance." It cannot be conservatism's agenda to arrange these toxic programs to the temporary satisfaction of state officeholders. The only agenda that makes fiscal, political, and constitutional sense is to disentangle "cooperative" state and local programs. Nationalize Medicaid-and give the money to the poor, not politicians; to people, not places or providers.

Conservatism may have become too lazy and besotted with states' rights cant to arrive at that conclusion. Hopefully, the impending High Court drubbing will prompt sober second thought.

Michael Greve is the John G. Searle Scholar at AEI

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